Revenue churn measures the amount of recurring revenue that a SaaS company loses over a given period (usually a month).
For any SaaS business operating on a subscription model, your growth rate has to exceed your revenue churn rate.
But how do you ensure this?
In this article, we’ll cover what revenue churn is, why it matters, how it’s calculated, and benchmarks to compare against.
We’ll also give you tips to reduce your revenue churn rates, cover some related metrics you should track, and answer a few FAQs.
This Article Contains:
(Click on the links below to jump to a specific section)
- What Is Revenue Churn?
- How to Calculate Revenue Churn?
- Why Does Revenue Churn Matter?
- Revenue Churn Benchmarks
- 4 Smart Ways to Reduce the Revenue Churn Rate
- Related Metrics
- Revenue Churn FAQs
Let’s get started!
What Is Revenue Churn?
Revenue churn is the percentage of recurring revenue a company loses over a period of time. It is also known as MRR churn (monthly recurring revenue churn).
Subscription-based companies may churn revenue when customers:
- Cancel their subscriptions (voluntary churn).
- Fail to renew their subscriptions.
- Downgrade their accounts.
Tracking revenue churn can help a SaaS company keep an eye on its business health, evaluate the effectiveness of its marketing efforts, and monitor customer retention.
Let’s have a look at the two ways you can measure revenue churn.
Net vs Gross Revenue Churn
There are two types of revenue churn:
- Net revenue churn: Net churn is the measure of lost revenue from cancellations and downgrades after considering new revenue gained from your existing customer base via upsells, cross-sells and more.
Here’s the formula to calculate the Net MRR churn rate:
Net MRR Churn Rate = [(MRR beginning of the month – MRR end of the month) – (Expansion MRR)] / [(MRR beginning of the month)] X 100
- Gross revenue churn: The total percentage of revenue lost in a month (monthly churn) due to subscription downgrades or cancellations, irrespective of the revenue you may have gained from existing customers.
Here’s the formula to calculate the Gross revenue churn rate:
Gross MRR Churn Rate = [(Downgrade MRR + Cancellation MRR) / (Total MRR at the beginning of the period)] X 100
So, while net churn factors-in expansion revenue, gross churn only focuses on revenue lost from cancellations and downgrades.
Now, let’s take a look at the revenue churn formula.
How to Calculate Revenue Churn
Here’s the formula for revenue churn calculation:
Revenue Churn Rate = (MRR lost that month – MRR in upgrades during the month) / (MRR at the beginning of the month) x100
Let’s understand this with the help of an example:
Suppose a company had $100,000 monthly recurring revenue (MRR) at the beginning of the month, it lost $10,000 due to subscription cancellations but gained $2,000 MRR in upgrades during the month from existing customers.
So, the revenue churn rate will be:
($10,000 – $2,000) / ($100,000) x 100
($8,000) / ($100,000) = 0.08 x 100
This means you lost 8% of your revenue.
Now that you know how to calculate revenue churn, let’s understand why it’s important.
Why Does Revenue Churn Matter?
Revenue churn is an important metric because it lets you:
1. Adds Context to Customer Churn
Revenue churn helps you analyze and monitor your losses to add context to what may be causing customer churn.
If you offer multiple price tiers and you observe a high customer churn rate but a low revenue churn, it could mean that you are retaining high-tiered customers while losing low-tiered ones.
2. Evaluate the Effectiveness of Your Nurturing Campaigns
Your revenue churn rate can show you how effective your nurturing strategies are in engaging your users and reducing churn.
Your email marketing, blog content, landing pages, and social media strategy are all part of the equation. Additionally, your SEO strategy can determine how successfully your content reaches new potential customers.
By creating useful content, you can reach more prospects and keep existing customers engaged. You can also help customers discover new features and use cases by sending out regular email updates, as it helps in increasing customer satisfaction.
3. Fine-Tune Your Pricing
A churned customer may have decided to discontinue using your services because the plans you offered were either too expensive or did not offer enough value for the price.
For example, if most of your low-tier accounts are churning, it could mean that although your plans are affordable, they do not offer enough valuable features for customer retention.
On the other hand, if a majority of your high-value accounts are churning, then it could mean that these plans are too expensive to justify a sustained subscription. In such a case, you will have to provide more advanced features to justify the value of your product or reduce the price.
4. Monitor Revenue Retention for Future Growth
Revenue churn can help determine how well you retain your revenue and is a key indicator of a company’s progress and stability.
High revenue retention rates depict a stable customer base and a great potential for growth, which may appeal to investors.
But that’s not all.
A high revenue churn rate can also help you anticipate future problems. This is crucial since revenue loss can result in companies failing to meet their financial obligations, such as paying vendors, payrolls, rent, etc.
It also affects a company’s capacity to invest in advanced technologies, products, and services, potentially resulting in a higher churn rate.
Now you may wonder…
Is there any such thing as a good revenue churn rate?
Let’s find out.
Revenue Churn Benchmarks
Benchmarks for SaaS churn are hard to pin down, as they can differ widely across companies and industries.
However, ProfitWell did a massive study on 3,000+ subscription companies and had some telling insights on the SaaS revenue churn rate.
For instance, established companies typically exhibit a lower revenue churn rate, ranging from 2-4%. On the other hand, companies that are three years old or less tend to have a higher churn rate, often ranging from 4-24% (with a median revenue churn rate of 11%).
Klipfolio sets the benchmark at 1% gross churn per month for enterprise companies or 2-2.5% monthly churn for small to mid-size companies.
Of course, when it comes to net revenue churn, you should aim for a net negative churn (i.e. the gains you make from new subscriptions, upsells, etc., should exceed the losses from downgrades, cancellations, etc.)
As long as you have a net negative revenue churn rate, your company is in a happy place.
Are your revenue churn rates not where you want them to be?
Let’s check out some ways which can help you reduce your SaaS churn rate.
4 Smart Ways to Reduce your Revenue Churn Rate
Here are a few steps you can take to reduce your revenue churn rate.
1. Ensure Customer Success
Customer success management is all about helping your customers achieve success with your product and within their own business operations.
You can boost customer success by:
- Enhancing the onboarding experience: Improve your onboarding experience by adding tutorial videos, product demos, and checklists.
- Investing in self-service: Customer self-service channels like a knowledge base or chatbots allow customers to solve their problems on their own. This way, they can derive value from your product quickly — without contacting customer support.
- Creating a proactive sales team: Ensure your sales team knows when to reach out to users. For example, sales reps should reach out to potential customers once they’ve hit a paywall or if they can’t seem to derive value from your product.
These strategies can create a more personalized user experience for your new customer or existing ones, improve customer service and help them achieve their objectives.
2. Consider Upselling and Cross-Selling
Upselling and cross-selling new and existing customers can help improve your net revenue churn rate.
What do these strategies entail?
Upselling is a sales technique that encourages customers to purchase a more expensive plan. Cross-selling, on the other hand, encourages customers to purchase add-ons or complimentary items to their existing plans.
Here’s an example:
Suppose a customer is considering a lower-tiered plan at check-out. In that case, a sales rep can reach out and encourage them to opt for a premium plan with additional features or persuade them to purchase add-ons to enhance their experience.
3. Implement Customer Feedback
If you give your customers what they want, they’re less likely to churn.
How do you do this?
Regularly gathering feedback through surveys from a lost customer helps in determining the reasons for service cancellations and identifying areas where they face problems.
Feedback from a lost customer provides valuable customer service insights. Implementing their suggestions also helps in improving customer satisfaction. This ultimately enhances their overall user experience.
By continuously improving your service based on feedback from the churned customer, you can reduce your churn rate and foster a loyal customer base, leading to increased revenue and business growth.
4. Prevent Cancellations by Offering Alternatives
Preventing cancellations can help SaaS companies improve their revenue retention. Even if the customer spends less money on the product, the company can still generate revenue from that customer rather than losing them altogether.
Here are three ways a SaaS business can prevent cancellations:
- Offer discounts and package deals: By offering discounts or access to premium features, customers may be more likely to continue their subscription instead of canceling. This can be especially effective if the incentive is only available for a limited time or if it’s tied to a specific behavior (such as renewing their subscription for another year).
- Offer users the option to downgrade: Giving customers the option to downgrade can help reduce the likelihood that they will cancel their subscription entirely. For example, if a customer is no longer using all the features of a premium subscription, they may be more likely to downgrade to a lower-priced plan rather than cancel entirely.
- Encourage long-term contracts: Another savvy way you can prevent contract cancellations is by offering your customers long-term or annual contracts at a discounted price, as it reduces the chances of voluntary churn.
Let’s have a look at some other metrics you could track along with revenue churn.
Below are a few other key metrics you can monitor to improve your revenue churn rate:
1. Customer Churn Rate
Customer churn rate is the percentage of customers that stopped using your product or services over a specific period.
Customer Churn Rate=([Customers at the beginning of the month] – [Customers at the end of the month] / [Customers at the beginning of month] X 100
2. Net Dollar Churn
Net dollar churn measures revenue lost and gained from your existing customer base due to cancellations, upgrades, and downgrades.
Net Dollar Churn = Revenue lost from cancellations + Revenue lost from customer downgrades or less spending – Revenue gained from existing customers spending more
ARR or annual recurring revenue is the predictable revenue generated by your business from customers within a year.
ARR = (Total contract value) X (12 / Length of contract in months) X (Number of customers)
4. Retention Rate
Customer retention rate is the percentage of customers who continue to use your product or service over a specific period of time.
Customer Retention Rate=[( Number of customers at the end of the period-New customers during the period ) / Number of customers at the beginning of the period] X 100
5. Renewal Rates
The renewal rate depicts the percentage of customers who renewed their contracts at the end of their subscription period.
Renewal Rates by Contracts = Number of extended contracts / Total number of renewable contracts X 100
Now, it’s time to answer some questions you may have in mind about revenue churn.
Revenue Churn FAQs
Here are the answers to some of the most frequently asked questions on revenue churn.
1. What is the Difference between Revenue Churn and Customer Churn?
Customer churn refers to the percentage of customers you lose over a certain period. Revenue churn, on the other hand, is the percentage of revenue you lose over a period.
2. What is a Negative Revenue Churn?
In net negative churn, the expansion MRR exceeds the MRR churn rate. Negative churn occurs when additional revenue from existing customers exceeds lost revenue from downgrades and cancellations.
Contrary to its name, a negative revenue churn rate is actually a positive indicator, implying that the expansion revenue from existing customers completely offsets the churned revenue.
To improve your revenue churn rate, it’s essential to prioritize customer retention. The strategies mentioned above can help companies reduce their churn rate while simultaneously fostering customer success.
However, neglecting SEO tactics may lead to missed opportunities in converting qualified leads into paying customers.
High-quality, resourceful content can help increase customer engagement and reduce churn.
Startup Voyager is a content and SEO agency specializing in helping SaaS companies create high-quality, optimized content to attract more prospects and reduce their SaaS churn rate.
Get in touch with a SaaS SEO expert at Startup Voyager today!